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Q&A w/BBH: Global Events, Global Turmoil

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Marc Chandler is global head of currency strategy with Brown Brothers Harriman, which earned this year’s award for fundamental analysis. He discusses how major world events are impacting currency markets.

Global Finance: How is the US—election and Federal Reserve—impacting currency markets now?

Marc Chandler: We need to see more details about president-elect Trump’s policies. He said he’ll focus on trade and fiscal stimulus, but we’re not sure of the sequence of activities. In addition, a lot of Republicans don’t have a desire for deficit spending.

Since the election, there’s been a sharp rise in interest rates and a rise in the markets. It’s as if they anticipate lower corporate tax rates, infrastructure spending, deregulation, higher corporate profits and other changes. We’ll have to see how they deliver. The Federal Reserve is likely to raise rates; we’re expecting more rate hikes next year.

GF: What changes in Europe are of concern?

MC: Three or four more elections will occur in Europe next year. In France and the Netherlands, the populist-nationalist parties are ahead. In Europe, populism is like an acid that’s eating away at economic integration. The reason our generations haven’t had to go to a war (like World War I and II) is economic integration. One thing that causes war is nationalism. That’s been kept in check by economic integration in Europe. I think by next year, the euro will trade at less than the US dollar. When it comes to the UK, the market is expecting a “soft” Brexit, in which the UK still has access to the European market. That’s seen as a positive for the pound sterling.

GF: What are the main issues in China?

MC: We saw rising trade tensions between the US and China pre-dating the election. President-elect Trump has threatened to cite China as a currency manipulator. However, the US Treasury has developed a more quantifiable definition of currency manipulator and concluded China doesn’t meet it. While there are plenty of indications that the People’s Bank of China is engaged in the foreign exchange market regularly, it has been buying its [own] currency. If Chinese officials were to stand back, we suspect the yuan would weaken sharply.

The big worry in the medium and long term is what China is going to do with its excess capacity. If mills and factories close, unemployment skyrockets. But a weak renmimbi and exports lead to trade tensions. The US has lost half its steel workers, partly due to automation, but partly due to China’s [currency] actions.

We have to figure out how to make room at the economic table for China in the least disruptive way possible. The Obama administration was able to keep Europe and Japan from recognizing China as a market economy, which is key in combating dumping. Will the rising nationalism in the US and Europe withstand China? Or, will rising nationalism in the US and Europe fan more Chinese nationalism?

GF: What’s ahead for the dollar?

MC: The divergence in monetary policy, and the wide gap between US interest rates and [those of] Europe and Japan is fueling the third major dollar rally since the end of Bretton Woods. It appears likely to be complemented by a currency-supportive policy mix in the US. The political focus shifts toward Europe next year. While there is some risk that the market has gotten a bit ahead itself as 2016 draws to a close, the bull market for the dollar still looks to be intact.